jrmckinley

I find things like this interesting and feel you can see a few different economic hints from people's buying behavior of cars and houses. A report just came out showing the average auto loan length for new cars has now reached an all time high of 69.3 months and the average amount buyers finance is $30,945 which is also at an all time high. The average monthly payment is $517 and average credit rating is 717 (one of the only encouraging stats IMO).

The stats in the used car market are pretty similar and both the used and new car loan stats all show an increase in every category (loan term, payment, amount financed, APR, and down payment) compared to June 2016. Again, down payment is the only encouraging stat here.

There are lots of potential conclusions to draw from this with the most obvious (but potentially wrong) conclusion is people are just buying more expensive cars. I certainly have some thoughts on this but curious to hear what others think. Here's the full article with graphs.

http://www.marketwatch.com/story/car...les-2017-07-03

Johnhav430

I find it bizarre that the average car loan exceeds 60 mos....besides the fact that 60 mos. already a case can be made it doesn't make sense, but the fact that the "average" is beyond 5 yrs....

Wonder how long people are borrowing, if they use a heloc to buy a car, could be 15 or more years....

imho FICO is inexact, and I think from my travels Experian is the toughest (a good thing)....mine used to be over 820, and once I took out 10k on a 0% no fee deal, and it dropped the next month to the 770's....I was like OH S***, that was stupid.

My wife has never had a loan in her life, guess coming from Europe believes in paying cash, but will use a rewards credit card, and her FICO is pinned. I wonder if she would be able to obtain a mortgage with no loan history....maybe not.

bitkahuna

iTrader: (20)

struggling to believe the 69.3 months stat... that's crazy...

Johnhav430

What's so odd about it, is beyond 5 yrs., which is imho the most common product with the longest length. I do see beyond on my credit union, so maybe they are pulling the avg or median above 60 mos. But no way, no how unless I'm this out of touch with reality, could the mode be above 60 mos. What is scary is I bet the median is near 60 mos. I admit, the LS430 is the first car I paid cash for that was more than $2,000, and I feel better having taken the money out of the bank and being done with it, rather than putting 14k down and buying a car for 28k (my 50% down rule). I guarantee I get more pleasure out of the LS430 than a 28k 2017 car....(can one even get a Malibu for that, because that was not a satisfying rental car)....

jrmckinley

And the fact it's the average length is really crazy. Another article I read a couple months ago in WSJ says 32% of new car loans ranged from 73 to 84 months in Q4 2016. For the average to now be approaching 70 months means the % of loans 73-84 months is going up... That's just mind boggling to me. I am pretty fascinated by some of the trickle down effects of what I think is happening here with new car sales and how it will cause a bubble explosion in used car sales.


I have a wacky theory on this. In a nutshell, I think these long loan terms allow car dealers to make more profit on used cars than new cars. This is driven by the majority of buyers being upside down in the cars they're trading in (tons of data to support this and that it's worse now than ever)...this negative equity simply gets rolled into the new car and these ridiculously long terms to keep the payments pretty close to what they were for the customer. Since the customer is already upside down and the loan terms on the next car can be so long, the dealer can really low ball the trade value of the used car which creates even larger negative equity for the customer and a healthier margin when the dealership actually sells the car. Data and transparency on used cars is also very different than new cars because there are so many variables that drive the value of a used car. So the dealer can use extra "fuzzy math" when giving you a trade value.

When I recently purchased a used LS460 from an Audi dealership, I thought it may be an ideal opportunity to easily get rid of my Audi S5 (which was a 3rd car for us). It was in absolutely mint condition with miles about 35% lower than annual averages, had brakes in last 10k miles, tires with less than 1k miles, etc. The dealership offered me $10k less than what I paid for it 9 months earlier (bought from a private party). I ended up selling it to a private party for what I paid for it... so to say they low-balled me on trade would be an understatement. It was an insulting offer. I probably could've negotiated up $2k or $3k on the trade, but no way could I have gotten in the same ballpark as what I sold it for and what I knew it was worth. I owned the car outright but think people are less sensitive when they don't own the car and think, "well, it's about $7k less than what I think it's worth but in a 7 year loan on the next car, it's only $80/month".

People are getting out of their cars at an alarming rate (trading in cars that are only 1-2 years old) which is flooding the market with inventory. Dealers know there's lots of used car supply and even more coming, so they're low balling the **** out of you on a trade. If a bubble bursts in the auto market (used car market in particular), I'd argue the car dealers did it to themselves.

jrmckinley

Your credit score probably took an initial hit for both the "pinging" of your SSN for applying for credit combined with the act of the "loan" itself. The ping typically gets removed or evens itself out about 90 days later. In essence, your score likely didn't stay at 770 for very long.

jadu

iTrader: (42)

yikes. it looks like a lot of car buyers don't run the interest calculations and pick the lowest monthly payment

joedaddy1

iTrader: (1)

not that surprised with low interest rates.. it's 0.0%-0.9% for around 60-months right? No reason to be "speedy" with payoff at that rate.

SW17LS

Don't be too encouraged about the 717 average credit score. 717 was once a great score, now its "fair", there are several tiers higher than that. Really you need a 780+ now to really have "excellent" credit, get the best rates, etc.

I'm minivan shopping, every calculator and website presents a payment on a 72 month loan. Thats the default now. Its funny, I'm not that old (I'm 36) and in the time I've been around cars I have watched the "default" term go from 36 months to 48 months to 60 months and now 72 months...over the span of about 25 years...

mmarshall

Part of the move to 6 and 7-year loans, of course, (along with extremely low interest rates), was so that the new-car market (and, to an extent, the used-car market as well) didn't dry up after the 2008-2009 economic crash, which literally threw millions of people out of work. In general, all else equal, the longer the loan-period (for the same amount of money) the lower the monthly payment will be....in some cases, less than $200 a month. The flip side, of course, is that the longer the loan-period, the longer one will stay in debt. And, with 6 and 7-year loans, they will often exceed the warranty period of the car, so that if you have a major breakdown, you not only will have a repair bill, but still be making monthly payments on top of that. That's why, IMO, if one is going to go that route, if makes a lot of sense to choose vehicles that have a history of good reliability.

SW17LS

Also you have to understand how low the default rate is on car loans, it's REALLY low.

jadu

iTrader: (42)

indeed, they are. haven't checked in a while. from my bank nfcu

Wandl

With the recent news of Wells Fargo slowing down their auto loan business (they used to be #2 in that market, now they're #7), the slowdown in the auto industry is impacted by rising delinquencies as well. Out of the estimated $1 trillion in outstanding auto loans, 5% are 60+ days delinquient; for Wells Fargo in fact auto loan delinquencies caused a 1% negative impact to their numbers (profits, if I'm not wrong). Now this isn't as bad as the mortgage crisis (cars are easier to reposess/resell, loan amounts are significantly lower than mortgages) but the auto loans market has a lot to be worried about.

I can't find the website but the Fed Reserve tracked # of applicants and approval rates - in October 2016, ~15% of the US population applied for an auto loan and a staggering 94.7% got approved. I could be off by a few basis points but to think that 95 people out of 100 got some level of approval for an auto loan is incredulous; no wonder dealerships were selling so many cars, because some weren't financially qualified to do so!

Nonetheless this isn't an encouraging sign and shows buyers are still payments based - they don't fully understand what they're getting into regardless of all the disclosures.

mmarshall

That's partly because it's often no picnic for a bank or finance company to actually follow through with repossessing a car. First, they have to pay a repo agent or firm to actually go get the vehicle, serve the owner with papers, and return it...which can be very difficult or hazardous for an agent if he or she is dealing with an owner who is armed, angry, or has a big dog (remember the TV series Operation Repo?)....man, I wouldn't want that job for all the rice in China. Then, once the bank pays off the repo firm and actually has the vehicle back in their custody, it's costing them money to keep it until they actually re-sell it again, donate it and take a tax write-off, or otherwise get rid of it. The owner may have deliberately damaged the vehicle out of spitefulness or vengeance from having to give it back up. He or she may attempt to retaliate against the repo firm or bank....don't laugh, it happens. Then, you sometimes have political issues....like if the repo company takes back vehicles from minorities and (often falsely) gets accused of racism in the local or national press. It's no wonder the actual default and/or repo action is low.

mjeds

I see dealers offering 72 and 84 month car loans all day long and it boggles my mind that people actually choose these options.

I have never financed a car more than 48 months, and usually stick to 36 months.. my father taught me a few things, 1 being, never buy a car that costs more than your NET for 6 months, and 2 being never finance a car for longer than the warranty, and if possible only finance the car if the interest you are paying on the loan is lower that what you are earning on investing the cash.. If you are earning less than the vehicle loan rate, pay cash.

If I can't afford the payment over 3 years, I can't afford the car.. just my humble opinion..